US stock markets fell sharply on Monday, as markets worldwide continued to react negatively to comments by the Federal Reserve last week and signs of weakness in the Chinese economy.

The Dow Jones Industrial Average was down more than 200 points before noon (1.4%), while the S&P 500 had shed over 27 points (1.7%). In Europe, all the major stock markets were down. The UK's FTSE 100 closed at a five-month low.

Stocks and bonds have all fallen in the wake of last week's Federal Reserve meeting. On Wednesday, chairman Ben Bernanke gave his clearest indication yet that the Fed intends to cut back on its $85bn-a-month stimulus programme, known as quantitative easing.

The sell off continued as problems in China stoked investors' fears. On Monday, the People's Bank of China told the country's largest banks to rein in risky loans and improve their balance sheets, triggering the biggest sell-off on China's Shanghai Composite index in nearly four years.

Gus Faucher, senior economist with PNC Bank, said the US sell-off was an overreaction that was unlikely to continue. "I think the fundamentals in the US are solid," he said. "The economy is continuing to expand, companies continue to add jobs, demand is holding up, profits continue to improve." The sell-off was probably a "necessary correction" after major gains in recent months, he said.

Bernanke's comments last week also triggered a sell-off in Treasuries. The Fed chairman said he intends to cut back on buying bonds when the unemployment rate, currently at 7.6%, drops to 7%. The sell-off in Treasuries continued on Monday, pushing up yields on 10-year notes to 2.621%, a full percentage point higher than their 1.621% low, on 1 May.

In a note to investors, Capital Economics said it did not expect a "blood bath" in Treasuries, despite Bernanke's comments. "Although we forecast the 10-year yield to creep up to 3.5% by the end of 2015, this would still be low by past standards," it said.